[Update on 10 January 2022] – There was some confusion on the computation of the Scheme Consideration Option – particularly the option on “cash + units of Mapletree Commercial Trust”. I have sent an email to the Investor Relations of Mapletree Commercial Trust to seek clarification and have reflected the correct computation in this post.
The year 2021 ended with the news that Mapletree North Asia Commercial Trust (SGX:RW0U) and Mapletree Commercial Trust (SGX:N2IU) have proposed a merger – with the enlarged REIT to be renamed as Mapletree Pan Asia Commercial Trust. Should the proposal be approved by unitholders of both REITs, the merged entity will become the 7th largest REIT in Asia (by market capitalisation.)
I have studied the documents provided by the REITs and in this post, you’ll find a summary of what the proposed transaction entails, rationale behind it, along with some key dates to take note of. On top of that, you’ll also read about my thoughts about it:
Details of the Merger:
Unitholders of Mapletree North Asia Commercial Trust have the option to choose between exchanging all their units of the REIT for units of Mapletree Commercial Trust, or a combination of cash and units of Mapletree Commercial Trust, as follows:
(i) Exchanging all Units of Mapletree North Asia Commercial Trust for Units of Mapletree Commercial Trust:
For this option, you will receive 0.5963 new Mapletree Commercial Trust units (at an issue price of $2.0039) for every single Mapletree North Asia Commercial Trust unit you own – for instance, if you have 1,000 Mapletree North Asia Commercial Trust units, if you select this option, you’ll receive 596 units of Mapletree Commercial Trust (computed by taking the 1,000 units of Mapletree North Asia Commercial Trust that you have, multiplied by 0.5963)
(ii) Exchanging Your Units of Mapletree North Asia Commercial Trust for both Cash and Units of Mapletree Commercial Trust:
For this option, you will receive a payout of S$0.1912 in cash, along with 0.5009 new Mapletree Commercial Trust Units for every single unit of Mapletree North Asia Commercial Trust that you have.
Using the same example of 1,000 Mapletree North Asia Commercial Trust units, if you select for this option, you will receive a cash amount of $191.20 (1,000 units x S$0.1912/unit), along with a total of new Mapletree Commercial Trust units (computed by multiplying 1,000 units by 0.5009, and rounded down to the nearest whole number – that will give you 500 new units of Mapletree Commercial Trust.)
Rationale of the Proposed Merger:
1. Unlock Full Potential of a Multi-Geography Asian Platform:
Mapletree Commercial Trust is a blue-chip REIT (where it is one of the constituents of Singapore’s benchmark Straits Times Index) with its property portfolio comprising of 5 retail, office, and business park properties all located in Singapore – with all but one of its properties located in the Harbourfront precinct.
As for Mapletree North Asia Commercial Trust, the REIT is the only Mapletree REIT where its portfolio does not have any properties located in Singapore – currently, it has a total of 13 retail, office, and business properties located in Hong Kong, China, Japan, as well as in South Korea.
The enlarged REIT will create a robust platform that combines the respective strength of both REITs – for Mapletree Commercial Trust, it is in their capability to record a steady compound annual growth rate (since post-IPO till September 2021) in its assets under management (by 11.5%), its net asset value (by 6.3%), as well as in its distribution per unit (by 4.8%); for Mapletree North Asia Commercial Trust, it is in their capability to drive inorganic growth through acquisitions of high quality properties spanning across multiple North Asian Markets.
On top of that, the merger also places the REIT in a better position to tap into deep liquidity and opportunities (including investment and asset enhancement opportunities), and also to benefit from the long-term rise of Asia by capitalising on the resilient growth in key markets.
2. Better Diversification across Geographies, and Reduced Single Asset Concentration:
Prior to the proposed merger, Mapletree Commercial Trust has 100.0% of its properties located in Singapore (by assets under management), while Mapletree North Asia Commercial Trust has 53.5% of its properties (by assets under management) located in Hong Kong (through Festival Walk.) Following the merger, the Merged Entity’s geographical diversification (with its percentage in brackets) will be as follows: Singapore (51.4%), Hong Kong (26.0%), China (10.8%), Japan (10.2%), and South Korea (1.6%).
Also, in terms of single asset concentration risk, prior the proposed merger, Mapletree Commercial Trust has a 43.3% concentration to one single asset (in Mapletree Business City), while Mapletree North Asia Commercial Trust has a 53.5% concentration to one single asset (in Festival Walk.) Following the merger, no one single asset will have a concentration of more than 26.0% towards its total assets under management, and they are as follows (with the percentage concentration in brackets): Festival Walk (26%), Mapletree Business City (22%), VivoCity (18%), Other Singapore Properties (11%), China Properties (11%), Japan Properties (10%), South Korea Properties (2%).
3. Reduced Income Concentration from Top 10 Tenants:
Before the proposed merger, the top 10 tenants of Mapletree Commercial Trust and Mapletree North Asia Commercial Trust contributed 28.3% and 38.0% towards its gross rental income respectively. After the proposed merger, the top 10 tenants will contribute just 23.1% – and this also implies a lower income risk.
4. DPU and NAV Accretive to Mapletree Commercial Trust Unitholders:
Assuming the proposed merger has been completed on 01 April 2021, the pro forma DPU for 1H FY2021/22 would have been increased by 7.5% from 4.39 cents to 4.72 cents (assuming all Mapletree North Asia Commercial Trust’s unitholders elect to receive the scrip-only consideration), or by 8.9% to 4.78 cents (assuming all Mapletree North Asia Commercial Trust’s unitholders elect to receive the cash and scrip consideration.)
As for NAV, assuming the proposed merger has been completed on 30 September 2021, the pro forma NAV per unit (ex-distribution) as at 30 September 2021 would have been increased by 7.1% from S$1.68 to S$1.80 (assuming all Mapletree North Asia Commercial Trust unitholders elect to receive the scrip-only consideration), or by 6.5% to S$1.79 (assuming all unitholders elect to receive the cash and scrip consideration.)
5. Enhanced Financial Flexibility to Pursue More Growth Opportunities:
Prior to the proposed transaction, Mapletree Commercial Trust has a debt funding capacity of S$2,911m and a gearing ratio of 33.7%, while Mapletree North Asia Commercial Trust has a debt funding capacity of S$1,340m and a gearing ratio of 42.2%. Post-merger, the merged entity will have a debt funding of S$3,785m, and a gearing ratio of 39.2% – allowing it to capture investment opportunities as and when they present themselves, having a greater financial flexibility to pursue larger acquisitions and undertake capital recycling initiatives, as well as strengthening its overall ability to compete for inorganic growth opportunities.
Important Dates Relating to the Proposed Merger to Take Note of:
The following are some of the important dates relating to the proposed merger of the 2 Mapletree REITs to take note of:
- Joint Announcement of Trust Scheme – 31 December 2021
- Expected date of EGM (for both Mapletree Commercial Trust and Mapletree North Asia Commercial Trust) – By Mid-April 2022
- Expected Effective Date of Trust Scheme – By End-May 2022
- Expected Date of Payment of Scheme Consideration to Mapletree North Asia Commercial Trust Unitholders – By Early-June 2022
- Expected Commencement Date of Trading of Consideration Units – By Early-June 2022
- Expected Delisting of Mapletree North Asia Commercial Trust – By Mid-June 2022
I am of the opinion that the proposed transaction is a favourable one for Mapletree North Asia Commercial Trust’s unitholders than it is for Mapletree Commercial Trust’s unitholders – reason being that any concerns regarding the huge income concentration coming from the Festival Walk property, along with concerns regarding to the REIT’s high aggregate leverage (or gearing level) would have been “solved” with the merger – in that its income concentration in the merged entity would be just 22% (based on pro forma 1H FY2021/22 net property income of S$359.6m.) Also, in terms of aggregate leverage (for Mapletree North Asia Commercial Trust, its aggregate leverage was on the high side at 41.4% as of 30 September 2021), the merged entity is expected to have a gearing ratio of 39.2% as at 30 September 2021.
For Mapletree Commercial Trust’s unitholders however, there are 2 things that may be of concern – firstly it would be that its aggregate leverage after the merger will be increased from 33.7% (before the proposed merger) to 39.2% (and I know some unitholders are uncomfortable with REITs that have aggregate leverages edging towards the 40.0% mark, or above that); secondly, it would be the fact that Festival Walk will be the second largest contributor towards the merged entity’s income contribution (at 22% based on pro forma 1H FY2021/22 net property income of S$359.6m, with the largest income contributor coming from Mapletree Business City, at 24%.) – given the current situation surrounding Hong Kong (where borders are closed to tourists due to their Covid-Zero policy, along with uncertainties as far as regulations China may impose on the country – having such a concern is totally understandable.
On the other hand, this proposed transaction still has its positives in that the enlarged REIT will definitely see an improvement as far as trading liquidity is concerned, and it bodes well for unitholders (when its unit price goes up over time if its financial performance, portfolio occupancy and debt profile, and its distribution payout to unitholders continues to remain resilient.) Not only that, personally, as a unitholder of Mapletree Commercial Trust, one of the concerns I have (albeit a small one) is in the REIT’s concentration on one geographical location in Singapore (and there’s only so much it can expand in one country) – with the merger, it will not only have a geographical diversification in other locations, but at the same time it will also have a much bigger room to further increase its asset under management through the acquisition of more properties in other countries which the REIT currently has a presence in, all of them many times bigger than Singapore.
Also, for those who may have some concerns about the increase in aggregate leverage (to 39.2%), my personal take is that it is still pretty much acceptable (at least for me) – if I were to base it on the regulatory limit of 50.0%, there still remains a good 10.8% of headroom to go, and it passes my selection criteria for REITs to invest based on its debt profile (where I prefer REITs to have a debt headroom of about 10.0% to the regulatory limit.)
Finally, in case you’re wondering what I’m intending to do (as prior to today I was a unitholder of both Mapletree REITs), I have just divested all my unitholding of Mapletree North Asia Commercial Trust at $1.14 this afternoon – realising a capital gain of 13.7% (excluding distribution payouts I’ve received as a unitholder) for 2 reasons – first I do not want to end up with the possibility of having odd-numbered units, and also, if I were to opt for any of the 2 options, my average price of Mapletree Commercial Trust will go up (and I’m not into the idea of “averaging up”.) Also, as a unitholder of Mapletree Commercial Trust, I will vote in favour of the merger, as I am positive about the long-term prospects of the REIT going forward – in terms of the opportunities available to further expand its business presence in markets outside of Singapore after the merger.
Having said that, please note that all the opinions you have just read about above are solely my own, which I am sharing for educational purposes only. They do not represent any buy or sell calls for any of the Mapletree REITs. As always, please do your own due diligence before you make any investment decisions.
Disclaimer: At the time of writing, I am a unitholder of Mapletree Commercial Trust.
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